Google & The Destruction of Innovation

How Google's growth strategy is shutting down markets and hurting consumers
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ON OCTOBER 28th 2009, GOOGLE ANNOUNCED THAT IT would be releasing a free turn-by-turn GPS navigation application for Android smartphones. Within 48 hours, the stock prices of Garmin and TomTom, the world’s leading providers of GPS navigation systems and software, had plummeted by 22% and 37% respectively. Two months later, their stock prices remained largely unchanged.

Google’s critics have typically focused on two aspects of the company’s operations: its wealth of sensitive user data and its overwhelming share of the online search and advertising markets. However, the “Google Threat” has begun to take on a different form – one that jeopardizes innovation and destroys business models.

Many were surprised to hear that Google’s application would be free, as TomTom’s best selling consumer applications run for more than $100 a year. Furthermore, the company will continue to spend time and effort updating and improving the application in the coming months and years. However, Google isn’t interested in making money from the product – at least not directly. The purpose of Google Maps Navigation is to bring, and then keep users under its brand of products and services. Google holds a truly unique position in the online marketplace, where almost every company struggles to find a price or strategy that will allow it to profit from its creations. Google’s overwhelming share of the online search and advertising markets allows it to monetize almost all of its products and services without charging users a cent. Furthermore, many of Google’s innovations run at a continual loss and don’t even contain the company’s own advertisements. The vast majority of Google’s portfolio simply doesn’t exist to make money. Instead, they’ve been created in order to concentrate a user’s internet usage within the Google product sphere. In doing so, the company can grow its share of internet advertising exposures and improve its search algorithms by scanning every Gmail or YouTube its users create or view and every GPS destination they enter.

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Consumers have benefited from this unique strategy in two ways. Not only have they been given free substitutes for the costly programs they already use, they’ve also been able to use innovative products such as Google Street View, which would have been nearly impossible to monetize on either a subscription or pay-per-use basis. However, this can also have a number of unfortunate long term consequences for the consumer. Just as it did to the webmail industry when it released Gmail, Google’s announcement may spur on a period of innovation and increased competition in the navigation market. However, neither Garmin nor TomTom have the advertising power or product portfolio that would allow them to compete on price. Garmin is in a particularly tough spot, as it does not own its maps and instead pays a licensing fee for each navigation device it sells. Moreover, Google has the resources and dedication necessary to replicate almost any product feature or innovation that Garmin or TomTom might come up with. At the very least, the two companies could try selling a low-priced or free application that would be supported by (likely obtrusive) advertisements. However, even Google’s application is ad-free.

In the long run, this threatens eliminating all competition from the consumer navigation industry and therefore leaving consumers largely dependent on Google’s pace of progress and innovations to propel the industry forward. On the surface, this outcome might seem drastic. However, with smartphone market share expected to surpass 50% by 2014, it’s hard to see why consumers would continue to pay $200 for Garmin’s Portable GPS Navigator or $100 a year for TomTom’s smartphone software – especially when many smartphones come preloaded with Google products. Google would also have little difficulty creating a physical and significantly cheaper GPS unit, as it has begun working closely with manufactures such as Dell and Motorola for its Android smartphone and Chrome OS laptops. The company could even retail the unit directly from its website, as it has done with its Nexus One smartphone. Either way, a number of industry analysts believe that TomTom and Garmin’s consumer business models have been irreparably damaged – if not destroyed. How can survive in a market where their most dangerous competitor is not only disinterested in making money in that specific market, but is satisfied with selling its products at a perpetual loss?

Shutting down emerging markets

One of the most unsettling impacts of Google’s strength is how it affects its potential competitors. In 2007, Business Week wrote that Google could “close down a nascent market niche with the merest rumor that it might jump in.” Though Google generates 97% of its revenue (approximately $22 billion in 2008) from its advertising programs, it relentlessly pursues other online market opportunities. In 2009 alone, the company released over 50 new products and services. The risk this poses to start-ups is best embodied in Google’s famous “20 percent time”, which encourages all of Google’s employees to spend the equivalent of one day a week working on anything they want. In fact, the company claims that close to 50% its products have come from “20 percent time”, including Gmail, Google News and AdSense. With over 20,000 employees as of December 31st, 2009, it isn’t difficult to understand how this policy could scare even the best funded start-ups or those who thought they had a truly unique idea.

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However, this fear extends beyond the company’s nebulous research and development projects. Google has one of the strongest, most diverse and frequent consumer relationships in the world. This access allows Google to very quickly build up market share and awareness in almost any online market. In December, Google began placing an advertisement for its Chrome web browser on their iconic search page. This page had been clear of advertising and clutter since Google’s inception in 1998 and its simple design is often attributed to the company’s early success. By placing an ad on this page, Google was able to expose its new product to hundreds of millions of people a day – many of whom will trust the Google brand name and install it. In December, Google entered the URL-shortening market with “Goo.gl”. Though both TinyURL and Bit.ly control substantial market share and are well backed by Silicon Valley insiders, few believe that Google will have any difficulty usurping either player – particularly given that Goo.gl is now embedded in the company’s web browser.

Google’s brand also commands substantial loyalty. Should a competitor release a superior product or service, a quick migration of users is extremely unlikely. Not only does this provide the company with ample time to react, but the company’s $20 billion in cash and cash equivalents also ensures that it can dwarf any start-up’s budget. The company has been known to spend close to a billion dollars in a single quarter on various projects and its power as an acquirer allows it to be kingmaker in almost any emerging technology market. Unless a company is able to quickly build a strong and unusually loyal user base, it’s almost impossible to erect enough barriers to prevent or hinder Google’s entry into the market place. Even then, Google is capable of doing considerable damage at will or even whispers. This threat has undoubtedly hurt independent innovation by driving up start-up capital costs and scaring away would-be entrants.

Taking on the real world

Though Google’s role in scaring off technology start-ups is nothing new, it’s only recently that its business practices have begun to attack some of the world’s biggest industries and players. Google has traditionally focused its operations on two priorities: improving the quality of its search engine and advertising programs, and creating new and innovative products and services. However, the company has been so phenomenally successful that its strategy has changed. Internet users now spend an overwhelming amount of their time online using Google’s products, which make up 30% of the top 10 and top 50 websites visited worldwide. Additionally, the company’s dominance in the search engine and web advertisement market has enabled them to play a significant role in shaping internet traffic and commerce. As a result, Google stands to gain enormously from each additional internet user or minute spent So much in fact, that Google’s strategy has changed from just building products and services on the internet, to getting people to get on it.3

In July of 2009, Google announced that it would be releasing its own PC operating system, entitled Chrome OS. Despite the fact that Microsoft’s Windows product line retails for between $100 and $400, Google also announced that Chrome OS would be free. What makes Chrome OS so unique is that it is designed to work exclusively with web applications. The only application that will actually reside on the PC itself will be Google’s Chrome OS web browser. Each of the user’s activities, whether email, document editing or photo viewing, will take place online. Google’s goal with Chrome OS is to increase overall internet use and then ensure that this use is concentrated in Google’s products. As such, Chrome OS is optimized and set-up for Google’s suite of products and services, such as Gmail, Google Docs and Picasa. The cost to develop, distribute and market this product will be immense. The company’s decision to give the product for free is therefore a clear indication of how much the company gains from increased internet activity.

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Though the impact of Chrome OS is expected to be small at first, it represents a clear threat to Microsoft’s core business. This is particularly true in the netbook market, as these miniature laptops appeal primarily to price sensitive users, and typically retail for under $450. In 2009, Microsoft began discounting Windows by up to 75% for netbooks, in order to prevent Linux (which is also free) from gaining a toe-hold in the market. Though this strategy has been successful, it leaves Microsoft with little leeway when it comes to competing with Google. Moreover, Chrome OS’s use of Google’s free online office suite, Google Docs, allows users to save an additional $150 to $400 when compared to purchasing Microsoft Office.

In 2006, Google began offering free wireless internet in Mountain View, California, where the company is headquartered. The company has since been working with the San Francisco municipal government in setting up a larger network that will provide free WiFi to the entire city. If the project is a success, many expect a slow growing of the “GoogleNet” nationally. In 2009, the company paid for two months of free internet access in over 50 airports in the United States for holiday travelers. To many, this was a sign that Google had begun testing the financial feasibility of its free wireless municipal networks. As with Chrome OS, the company’s goal with this project is to encourage and facilitate increased internet use. However, what would “GoogleNet” mean for the country’s big telecommunications companies? How can they complete with free wireless internet? Add this to the company’s Google Voice platform, which provides free continental calls and heavily discounted global calls to over 1.5 million daily users, and it is clear to see how even companies as large as Verizon and AT&T might be frightened.

Google’s strategy will give the company control over a user’s entire online experience. If a user wants to send an email, read the newspaper or search for information, Google wants its products and services to power their computer, render the Internet, find their webpage and provide the content. Moreover, the company hopes that its search engine or web advertising would then direct the user to all of their subsequent web pages. In doing so, Google is able to capture an overwhelming share of the value generated from a user’s Internet activity and essentially locks its competitors out of every one of the company’s product markets.

The Internet, by Google

Google has created an incredibly effective and largely impenetrable empire. While this strategy will continue to provide consumers with a number of fantastic products, services and opportunities, it is also shutting down markets and stifling independent innovation. Furthermore, as the company continues to expand into the physical world, it’s hard to believe that these trends will stop. Google is no longer satisfied with dominating the online world, it wants to control the entire experience – from start to finish. In doing so, the company is effectively enveloping its users under the Google brand and insulating itself from any competition along the way. In the long run, this isn’t good for consumers.

The issues of Google’s privacy policies and share of the online search and advertising markets are undoubtedly important. However, what’s potentially more significant is how Google’s operations affect each of the industries within which it operates. Unfortunately, there are few solutions to this problem. You can’t punish a company for being innovative, or for giving its products away for free. Though it’s impossible to know what Google will do next, you can guarantee that it will be big. In December, the company formed a new subsidiary, “Google Energy” and applied for a federal license to buy and sell wholesale electricity.


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